ISSUE 3 May 29, 2008
PREPAY FOR 2009 FERTILIZER?
I have received several questions regarding the wisdom of prepayment of fertilizers for the 2009 crop. This is odd because the 2008 crop is not yet entirely seeded, with fertilizer decisions still remaining for this growing season. Although I am certainly not a seer by trade, and donít have a 900- number that one might call for this information, I will offer my insight into why these offers might be happening and what I would do if I were confronted with this issue. Having spent eighteen formative years in the retail fertilizer business, I have at least some background to help form these thoughts.
There are several reasons for offering a prepayment for fertilizer and other ag-goods. The first is to lock in business for the next season. The second is to help with cash flow. The third might be to bail out of higher priced goods knowing that next seasons costs will either remain the same or go down.
The first reason might explain discounts to products and services offered before the first of the year. Prepayment for spring is common during December and early January for winter/spring delivered goods and services. However, I do not think this is the reason for wanting a grower to lock in product now.
The second reason is a major consideration for retail/wholesale businesses right now. Two years ago, the entire fertilizer purchase for spring by a company might be $20 million. This year, with rising costs, the credit required might be $60 million. There is a credit problem in the entire country according to news sources that is far larger than just agriculture. In a normal credit environment tripling a credit line would be difficult. In a tight credit market, increasing credit lines is even harder. Therefore there is incentive to encourage prepay to help cash-flow. This is particularly important since decisions for retailer "fall-fill" for fall applications need to be made really soon to have product on-hand in September-November.
The third reason may or may not be happening. It is difficult to know. However, in my experience, if product were really tight businesses seldom offer prepay. Why take less money now if you are guaranteed more later? Doesnít make much sense. Prepayment is usually only offered if there is adequate product on hand. Also, if I were stuck with several hundred tons of product that tripled in price in the last 6 months, but people lowered the product they bought due to the price and I was stuck with it, I would want to get rid of it before the price dropped to half of what it is right now. I heard a report that the prepayment for MAP was $1,200/ton (todayís price) but that it was probably going to $1,900 next year according to the prepay source. I will boldly take the opinion that the chances of MAP going to $1,900 are incredibly slim and if it did, no one would care because no one could afford to buy it. Our data show that on low testing P soils, a yield increase for most crops would be about 25%. Given a yield potential for wheat on fertile soils in central ND of 40 bu/acre, that means that without P, yield might be 32 bu/a. Our current recommendation encourages application of 40 lb P2O5 (about 80 lb/a MAP) under those conditions. 8 bu/a wheat at $7/bu is a $56/acre potential return from P. The MAP required to make that happen would cost $76/acre at $1,900/ton. Even at $1,200/ton, the return would be under $10/acre. Given the risk at putting in the crop, I would suggest to producers that with MAP at $1,200, they should only put on half of a normal rate. The response curve of crops to P is curvilinear, meaning that the greatest increases are due to the first Ĺ of the application rate. So you lose a couple bushels by not putting on the full amount, but you might gain $10/acre and donít have to borrow as much or risk as much. Growers cannot and will not apply as much fertilizer at current or higher prices. So I believe that the chance of prices going lower are good.
My recommendation? Prepayment in the fall for spring needs is good. Prepayment in the spring for next springs needs is probably not good.
Dr. Dave Franzen
NDSU Extension Soil Specialist